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Recent Decisions And Developments Affecting Licensing - June 2009

By Brian Brunsvold and John C. Paul

PATENT OWNER MAY OBTAIN INJUNCTION OF PRODUCT COMPETING WITH ITS FLAGSHIP PRODUCT EVEN IF IT HAS LICENSED ITS PATENTS TO OTHERS AND THE INFRINGING PRODUCT IS ALLEGED TO BE SAFER

In 2006, in eBay Inc. v. MercExchange, the United States Supreme Court eliminated the presumption that a permanent injunction necessarily follows a finding of patent infringement and instead required district courts to use the same four-factor test for permanent injunctions applied in all other cases. Accordingly, after eBay, the court may enter a permanent injunction only if the following factors weigh in favor of the patent holder:

(1) the patentee has suffered an irreparable injury;
(2) remedies such as monetary damages are inadequate to compensate for the injury;
(3) considering the balance of hardships between the plaintiff and the defendant that an injunction is warranted; and
(4) that the public interest would not be disserved by a permanent injunction.

One factor often considered by courts in performing this analysis is whether the patent holder has previously licensed its patents. Often, courts will find that previous licenses demonstrate that monetary damages may be adequate tocompensate for the infringement. In Acumed v. Stryker Corp., No. 2008-1124 (Fed. Cir. Dec. 30, 2008), the Court of Appeals for the Federal Circuit held that the district court did not err in granting Acumed’s request that the Stryker be enjoined from selling its T2 orthopedic nail, which competed with Acumed’s Polarus product in treatment of bone fractures, even though Acumed had previously licensed the patent-in suit.

The district court had granted an injunction after applying the four factor test, finding: (1) irreparable injury resulted from Acumed and Stryker’s sale of competing products that led the jury to award lost profits, and Stryker’s actions had diminished the significance of licenses that Acumed had granted to its patent; (2) Acumed had a greater hardship because it was a much smaller company than Stryker and the infringing product competed with Acumed’s flagship product; and (3)
Stryker could not be shielded from an injunction based on its public health arguments that the T2 was safer than the Polarus.

The Federal Circuit reviewed the district court’s application of the four-factor test. As to the irreparable harm and lack of adequate remedy from monetary damages, the Federal Circuit noted an essential attribute of a patent grant is the right to exclude competitors from infringing the patent. Since Acumed had shown that it was in direct competition with Stryker, the Federal Circuit agreed with the district court that Acumed had shown the existence of irreparable harm.

Stryker argued that Acumed had granted licenses in the past, evidencing that Acumed could be adequately compensated for any harm by monetary damages. But the Federal Circuit found that many events could contribute to Acumed’s irreparable harm now, including changes in the market since the licenses were granted or the fact that adding a new competitor might create harm that the prior licenses did not. Since the district court considered all these events, the Federal Circuit found that the district court did not abuse its discretion in finding Acumed suffered irreparable harm from Stryker’s infringement. Importantly, the Federal Circuit noted that under different circumstances it might be appropriate to deny injunctive relief because the patent holder had licensed the technology to other competitors.

In considering the balance of hardships, the Federal Circuit initially noted that the balance considered is only between the plaintiff and the defendant, not the effect on customers or patients, as alleged by Stryker.

Further, the Federal Circuit stated it would not consider Stryker’s argument that the lower court should have considered
Stryker’s expenses in designing and marketing T2, since those expenses were related to an infringing product. The law does not protect one who elects to build a business on a product found to be infringing. Thus, the Federal Circuit agreed with the district court that the balance favored Acumed, since T2 represents only a portion of the larger Stryker’s sales, whereas the Polarus is one of Acumed’s flagship products.

Finally, the Federal Circuit found the district court did not abuse its discretion in dismissing Stryker’s evidence that the T2 was safer than the Polarus. According to the Federal Circuit, the district court was properly within its discretion when it weighed this testimony and evidence and determined that the public would not be disserved by an injunction of the T2.

A “COVENANT NOT TO SUE” MAY NOT END A PATENT INFRINGEMENT CASE IF THE COVENANT ONLY APPLIES TO PAST SALES

When a patent holder sues an accused infringer for patent infringement, the accused infringer often files a counterclaim against the patent holder for a declaratory judgment that the patent holder’s patent is invalid or unenforceable. Such a declaratory judgment action can only be maintained while there is an actual controversy between the parties. Should the “actual controversy” between the parties end at any time during the case, the district court is divested of jurisdiction over the whole case and must dismiss the lawsuit. Under MedImmune, Inc. v. Genentech, Inc.“totality-of-the-circumstances” test for deciding whether an actual controversy existed between the parties, based on the particular facts and relationships in the case.

In some circumstances, where serious concerns arose as to a patent’s validity or enforceability, patent holders have unilaterally covenanted not to sue the opposing party for patent infringement, terminating the “actual controversy” between the parties and ending the lawsuit, but preserving the validity and enforceability of the patent and any pre-existing licensing agreements based on the patent.

Whether a covenant not to sue will divest the district court of jurisdiction depends on what is covered by the covenant, since the language of the covenant directly relates to the “totality of the circumstances” test for determining if an “actual controversy” exists. In the past, the Federal Circuit has found that a covenant not to sue that extended to future production and sale of the same products that were subject of the patent infringement suit was sufficient to end the actual controversy and the lawsuit. Thus, in those cases, the covenant covered the current products, regardless of whether they were  produced and sold before or after the effective date of the covenant.

In Revolution Eyewear, Inc. v. Aspex Eyewear, Inc., No. 2008-1050 (Fed. Cir. Feb. 13, 2009), the Court of Appeals for the Federal Circuit held that the patentee’s covenant not to sue for past infringement did not oust the district court of jurisdiction over the accused infringer’s counterclaim because an actual controversy still existed under the Declaratory Judgment Act.

This case involved two competitors in the eyewear industry. The plaintiff, Revolution Eyewear, accused the defendant, Aspex Eyewear of infringing a patent on magnetically-attached auxiliary eyeglasses. In 2003, Revolution sued Aspex in district court in California for patent infringement and Aspex filed a counterclaim suit arguing, among other things, that Revolution’s patent was invalid and unenforceable. Just prior to trial, Revolution sent Aspex a “covenant not to sue” that stated: Revolution. . .hereby unconditionally covenant[s] not to sue Aspex for patent infringement under the ’913 patent based upon any activities and/or products made, used, or sold on or before the dismissal of this action.

Notably, this covenant did not protect Aspex from suit if it marketed the same accused products in the future. After issuing the covenant, Revolution asked the district court to dismiss the case, arguing that the covenant not to sue effectively ended the controversy between the parties as to patent infringement.

The District Court for the Central District of California dismissed both Revolution’s patent infringement claim and Aspex’s counterclaims, finding that the covenant not to sue was sufficient to remove the possibility that Aspex may be sued for patent infringement, and thus, the court no longer had jurisdiction over the case. Aspex, wishing to continue its invalidity and unenforceability counterclaim, appealed to the Federal Circuit.

The Federal Circuit noted that the language of Revolution’s covenant did not extend to future sales of the accused product, that Aspex had some of the accused product in storage and wanted to sell it, and that Revolution stated that it will return to court if Aspex reenters the market with these products. From this, the Federal Circuit found that under the “totality of the circumstances” the actual controversy between the parties still existed and the district court should not have dismissed
Aspex’s declaratory judgment counterclaim of invalidity and unenforceability.

UNCONDITIONAL COVENANT NOT TO SUE AUTHORIZES SALES AND EXHAUSTS PATENT OWNER’S RIGHTS

In Quanta Computer Inc. v. LG Electronics, Inc., the Supreme Court held that patent owners who “authorize” the sale of a patented item exhaust their patent rights in that item. In TransCore LP v. Electronic Transactions Consultants Corp., No. 2008-1430 (Fed. Cir. Apr. 8, 2009), the Federal Circuit held that by granting a covenant not to sue, TransCore effectively authorized a sale that exhausted its patent rights.

TransCore manufactures, sells, and installs automated toll collection systems, such as E-ZPass, and owns several patents to related technologies. In 2000, TransCore sued a competitor, Mark IV Industries, for patent infringement.

The parties eventually settled, and executed a covenant not to sue that read: “[TransCore] agrees and covenants not to bring any demand, claim, lawsuit, or action against Mark IV for future infringement.”

Several years later, ETC won a bid with the Illinois State Toll Highway Authority to install a new toll system. As part of the contract, ETC agreed to set up a Mark IV system that the state had purchased. TransCore then sued ETC for infringement of the same patents that were the subject of the settlement agreement with Mark IV. On ETC’s motion for summary judgment, the district court held that the TransCore-Mark IV agreement exhausted TransCore’s patent rights. Rejecting TransCore’s efforts to differentiate the downstream effects of licenses and covenants not to sue, the Federal Circuit reiterated its previous decisions holding that “a nonexclusive patent license is equivalent to a covenant not to sue.” The court then defined the issue: “The real question, then, is not whether an agreement is framed in terms of a “covenant not to sue” or a “license.” That difference is only one of form, not substance--both are properly viewed as “authorizations.”
Rather, the pertinent question here is not whether but what the TransCore-Mark IV settlement agreement authorizes. More specifically, does the TransCore-Mark IV settlement agreement authorize sales?”

Under the facts, the court found the language of the agreement authorized all acts that would otherwise be infringement, i.e., making, using, offering for sale, selling, or importing, and it commented that the agreement could have but did not have a restriction or limitation on sales. Therefore, it concluded that the district court did not err in concluding that the covenant not to sue authorized the sales, and the patent rights were exhausted. Editorial note: This decision does not broadly equate licenses and covenants not to sue. But, it does suggest care in relying on covenants as having less effect than a license. The Federal Circuit found exhaustion because, under the particular facts, the covenant not to sue granted the covenant’s recipient an unrestricted right to sell products within the scope of the patents. As the court noted, had the covenant been drafted differently, the outcome may have been different. It may be useful to evaluate a covenant not to sue in terms of whether it conveys an implied license under principles of equitable or legal estoppel. If it amounts to an implied license, patent exhaustion is probable. While some of the discussion in the TransCor decision suggests a covenant not to sue is the same as a license, under the facts there considered, it does not hold that they are the same for all purposes.

For example, does a covenant not to sue bind a future assignee of the patent or is the covenant’s recipient under a patent protected. If the patent owner may have clarified the downstream effect of a covenant not to sue in terms of exhaustion, it does not clarify the difference between a license which encumbers an assignee of the patent and a covenant not to sue which is only a promise by the existing patent owner and not any future assignee.

A DISTRICT COURT CONCLUDES QUANTA OVERRULES FEDERAL CIRCUIT PRECEDENT, FINDING A SALE OUTSIDE THE U.S. CAN EXHAUST U.S. PATENT RIGHTS AND THAT A LICENSE AGREEMENT CONSTITUTES A SALE FOR PURPOSES OF PATENT EXHAUSTION

In 2008, the U.S. Supreme Court ruled, in Quanta Computer Inc. v. LG Electronics Inc., that the authorized sale of a component may exhaust patent rights covering the combination of that component with other parts, but only when: (1) the “only reasonable and intended use” of the component is to practice the patent; and (2) the component “embodies essential features of the patented invention.” In that case, LG had licensed Intel to sell integrated circuits under its patent covering both integrated circuits and computer systems including such integrated circuits. The Supreme Court held that because the integrated circuits sold by Intel met the two part test above, and because Intel was broadly authorized to sell those circuits, the principle of patent exhaustion barred LG from suing computer makers who combined Intel parts with non-Intel parts to make computer systems.

In LG Electronics, Inc. v. Hitachi, Ltd., No. 07-6511 (N.D. Cal. March 13, 2009), LG was again asserting the patents at issue in Quanta, against a different manufacturer and was faced with a similar issue of patent exhaustion. In this case, however, LG argued that Quanta did not apply because the Intel parts in this case did not substantially embody LG’s patents as did the Intel parts that the Supreme Court considered in Quanta. The district court rejected this argument, however, and found
that similar to Quanta, the circuits at issue substantially embodied the patented invention.

The district court next addressed an issue that was not handled directly by the Supreme Court, specifically, whether patent exhaustion occurs when a product is sold outside of the United States. Prior to Quanta, the Federal Circuit had held that only sales made in the United States would exhaust U.S. patent rights. The district court, however, found that while the Supreme Court in Quanta did not expressly overrule those prior Federal Circuit decisions, at a minimum, Quanta undercut the reasoning of those cases.

In Quanta, the Supreme Court intended to eliminate the possibility of a patent holder doing an “end-run” around the patent exhaustion doctrine by authorizing a sale, then suing a downstream purchaser for patent infringement. The Supreme Court said that such a result would violate the longstanding principle that, when a patented item is once lawfully made and sold, there is no restriction on its use to be implied for the benefit of the patentee.

From that principle, the district court concluded that to draw a distinction between authorized domestic sales and authorized foreign sales would negate the Supreme Court’s stated intent in Quanta and held that those authorized foreign sales exhausted the U.S. patent rights, despite Federal Circuit precedent to the contrary. As a backstop to that position, the court held that even if a foreign sale did not exhaust U.S. patent rights, LG’s paidup, nonexclusive, cross license agreement constitutes a sale for purposes of patent exhaustion and because the agreement was governed by New York law, an authorized sale had occurred in the United States, exhausting the U.S. patent rights.

Submission to EPO on computer-implemented inventions - April 30, 2009

LESI written statements in accordance with Article 10 of the Rules of Procedure of the Enlarged Board of Appeal on the case G3/08.

Patent Litigation Report - March 24, 2009

The Commission sets out next steps for creation of unified patent litigation system.

European and Community Patent Courts and Draft Statute - March 23, 2009

Draft Agreement on the European and Community1 Patents Court and Draft Statute.

European Patents Court - Economic Study - February 25, 2009

This report recommends strongly that the Presidency should proceed in its efforts to establish a unified and integrated patent litigation system for European patents and future Community patents. For conservative estimates of the relevant parameters, the economic benefits from such a system are likely to exceed the costs of the establishment and operation of the new court by a large multiple of between 5.4 and 10.5. Moreover, with prudent design choices it should be possible to implement a litigation system that will be balanced and supportive of overall efforts to improve the quality of patents in Europe.

LESI response on horizontal co-operation agreements - January 30, 2009

Response of LESI to European Commission review of current regime for the assessment of horizontal co-operation agreements.

LESI comments in response to Pharmaceutical sector enquiry - January 30, 2009

Comments of the LESI European Committee in response to the pharmaceutical sector enquiry preliminary report published by the European Commission (DG Competition).

European Patent Office queries aspects of EC's pharma enquiry report - November 28, 2008

Comments from the EPO.

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